When To Choose A Consumer Proposal Vs. Bankruptcy | Refresh Financial
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When To Choose A Consumer Proposal Vs. Bankruptcy

When To Choose A Consumer Proposal Vs. Bankruptcy

For many Canadians who are stuck in debilitating debt, sometimes the only way out is through a consumer proposal or bankruptcy. The differences between these two options is often misunderstood, so if you're in a tight spot, this blog will help you decide when to choose a consumer proposal vs. bankruptcy.

What is the definition of a consumer proposal?

A consumer proposal is essentially an offer to your creditors. You are offering to repay as much of your debt back as you can. It will be a certain percentage of the full amount you owe. Once accepted, you will have to complete the proposal by sticking to the agreed upon repayment plan. In 2014, 53,000 Canadians filed a consumer proposal. It can be a great choice for a lot of people.

What is Bankruptcy?

Bankruptcy, according to Wikipedia, is:

a legal status of a person or other entity that cannot repay debts to creditors.

Unlike a consumer proposal, you will no longer have to pay back your debts (with exceptions). However, you aren't off the hook. You will go through months of having to report to your bankruptcy trustee where every last penny is being spent in your life. Once discharged from bankruptcy, it will remain on your credit report for six years, effectively acting as an anchor to your credit score.

Related Article: For more on dealing with bankruptcy, read our blog “ 5 Signs That Suggest You Shouldn’t File for Bankruptcy”.

When should a consumer proposal be chosen over bankruptcy?

There are many reasons to choose a consumer proposal over bankruptcy. Here are a few of them:

1. Creditor protection

A consumer proposal comes with creditor protection. Once your proposal has been accepted, your creditors will no longer be able to hound you for the full amount of what you owe. That means no legal action can be filed against you, no more harassing phone calls and no more collections.

2. Keeping your existing assets

When you file bankruptcy, you often have to turn over your assets to be liquidated so that your creditors can be paid. With a consumer proposal, you get to hang on to your assets.

3. Customized payments

The payment plan you come up with during your consumer proposal will be a plan you can manage and will leave you with something to live on.

4. Less complicated process

The consumer proposal process is far less complicated than declaring bankruptcy and getting to your discharge date. You do not have to report your income and spending each month and you won’t feel like your whole life is under a microscope.

5. Lower impact on credit

In general, a consumer proposal is not as harmful to your credit score as a bankruptcy is. A bankruptcy will stay on your credit report for six years, while a consumer proposal will drop off after three years. How will a consumer proposal affect your credit? That will depend on what else is on your credit report, but it will drag your score down significantly. That’s guaranteed.

How to recover from a consumer proposal and bankruptcy

Declaring bankruptcy or entering into a consumer proposal can be psychologically tough and emotionally difficult. It’s important to remember that there is light at the end of the tunnel and there are things you can do to ensure that light is as bright as it can be when it gets there. Make sure you read our previous piece about recovering from each of these processes.

You can ensure that your post consumer proposal credit rating ends up great.

Ultimately, whether bankruptcy or consumer proposal is better for you depends on your situation. Your needs are going to determine which is the right choice for you.

Can you think of any other differences between consumer proposal and bankruptcy? Let us know in the comments!

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